“May you live in interesting times,” often described as an old Chinese curse (the actual derivation is unknown), seems apropos given the year that just ended. For those of us who survived, we may feel fortunate that the mortality rate has not reached levels seen during the Spanish flu nor anywhere close to levels realized during the Black Plague, but for those who have lost loved ones, this brings little solace and our hearts go out to them.
We began the year with strong economic growth; however, we quickly saw the coronavirus spreading throughout the globe and governments shutting down economies in an attempt to control the pandemic. These lockdowns had varying degrees of success but led to an unprecedented decline in economic activity. Governments then brought about fiscal and monetary stimulus to support those affected by the lockdowns which, in turn, led to unprecedented economic growth. Here in the US, 2nd quarter GDP declined by 31.7% (on an annualized basis), followed by 3rd quarter growth of 33.4% (on an annualized basis).
Through the year, remote offices become the new norm; but jobs without this option, such as lower-paying service jobs, took a major hit. As supply chain disruptions ensued, many companies and governments were forced to rethink their reliance on China.
As the year drew to a close, a Brexit agreement was finally arranged four and a half years after the referendum. While many items remain to be settled, trade on goods between the EU and the UK will continue to be free of tariffs and quotas. Service industries, however, could face barriers. And of course, vaccines to combat COVID-19 were developed and approved in record time. Distribution has just begun.
Lest we forget, a tumultuous election ended in the US in which the country voted for a Democratic president, control of the House to remain with the Democrats; although giving a number of seats to Republicans, and control of the Senate still undecided due to the two runoff elections in Georgia.
Earlier, well before the economy turned around, markets moved higher in response to the government’s stimulus, not too differently from the way markets responded after the stimulus following the Great Recession of 2008. As a result, the S&P 500 finished the year with a gain 18.4%. However, the advance on Wall Street hides the fact that most stocks did poorly through the year, and the rise in the S&P 500 was led by a small percentage of companies, somewhat reflecting what actually happened on Main Street. This disparity is evident by the difference in returns between growth and value stocks. For the year, large cap value stocks were up 2.8%, but large cap growth stocks were up a whopping 38.5%. This trend began to reverse, however, due to expectations of reopening the economy, and value stocks outpaced growth stocks in the 4th quarter.
Breaking the recent pattern, small cap stocks fared better than large caps. For the year, the Russell 2000 returned 20.0%. Similar to recent trends, though, international large cap developed market stocks trailed US stocks but still managed to grow 8.3%. Emerging market stocks fared better and rose 18.7%.
Bond investors also had a positive year. Due to the Federal Reserve cutting rates to 0%, bond values appreciated as well. Two year Treasuries began the year yielding 1.58%, 10 year Treasuries yielded 1.92% and 30 year Treasuries yielded 2.39%. By year’s end these yields had fallen to 0.13%, 0.93%, and 1.65%, respectively. US Aggregate bonds were up over 7%, with shorter maturities gaining less than longer maturities. High yield and emerging market bond investors were also rewarded, earning 6.2% and 5.3%, respectively.
Real return strategies, which are more economically sensitive, had a tougher year than the stock indices. Real estate declined 5.1%, infrastructure lost 6.2% and commodities declined 3.1%.
Absolute return strategies, which helped to dampen volatility though the year, produced returns which varied greatly among the strategies, as expected. Global macro strategies returned 3.6%, market neutral strategies -16.4%, and managed futures -0.4%.
So, despite the economic lockdown, investors enjoyed another good year. With more stimulus on the way and distribution of vaccines, we are cautiously optimistic going into 2021. We look forward to the time when businesses can resume as normal.
The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this article was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitute a solicitation for business or a recommendation for purchase or sale of securities, commodities or bank products.
Washington Trust Bank.